Douglas Dynamics(PLOW) - 2024 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides the unaudited condensed consolidated financial statements and management's discussion and analysis for the company Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for Douglas Dynamics, Inc., including the Balance Sheets, Statements of Operations and Comprehensive Income, Statements of Cash Flows, Statements of Shareholders' Equity, and accompanying notes, covering periods up to June 30, 2024 Unaudited Condensed Consolidated Balance Sheets The balance sheet shows total assets increased to $616.97 million at June 30, 2024, from $593.42 million at December 31, 2023 Current assets saw a notable rise, primarily driven by accounts receivable, while total liabilities also increased, with short-term borrowings and current portion of long-term debt contributing to the rise in current liabilities | Metric | June 30, 2024 ($ thousands) | December 31, 2023 ($ thousands) | | :--------------------------- | :-------------------------- | :------------------------------ | | Total Assets | 616,967 | 593,418 | | Cash and cash equivalents | 4,196 | 24,156 | | Accounts receivable, net | 140,198 | 83,760 | | Inventories | 139,419 | 140,390 | | Total Current Assets | 293,812 | 262,238 | | Total Liabilities | 329,885 | 303,056 | | Total Stockholders' Equity | 236,657 | 231,565 | Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income For the six months ended June 30, 2024, net sales increased by 2.0% year-over-year, while net income saw a significant increase of 47.3% Gross profit margin improved from 25.1% to 27.1% for the six-month period For the three months ended June 30, 2024, net sales decreased by 3.6%, but net income still saw a slight increase of 1.6% | Metric (Six Months Ended June 30) | 2024 ($ thousands) | 2023 ($ thousands) | YoY Change ($ thousands) | YoY Change (%) | | :-------------------------------- | :----------------- | :----------------- | :----------------------- | :------------- | | Net sales | 295,557 | 289,812 | 5,745 | 2.0% | | Cost of sales | 215,334 | 217,174 | (1,840) | (0.8%) | | Gross profit | 80,223 | 72,638 | 7,585 | 10.5% | | Income from operations | 29,881 | 20,764 | 9,117 | 43.9% | | Net income | 15,986 | 10,854 | 5,132 | 47.3% | | Basic EPS | 0.68 | 0.46 | 0.22 | 47.8% | | Diluted EPS | 0.66 | 0.45 | 0.21 | 46.7% | | Metric (Three Months Ended June 30) | 2024 ($ thousands) | 2023 ($ thousands) | YoY Change ($ thousands) | YoY Change (%) | | :---------------------------------- | :----------------- | :----------------- | :----------------------- | :------------- | | Net sales | 199,902 | 207,267 | (7,365) | (3.6%) | | Cost of sales | 138,599 | 145,904 | (7,305) | (5.0%) | | Gross profit | 61,303 | 61,363 | (60) | (0.1%) | | Income from operations | 36,303 | 34,561 | 1,742 | 5.0% | | Net income | 24,338 | 23,964 | 374 | 1.6% | | Basic EPS | 1.03 | 1.02 | 0.01 | 1.0% | | Diluted EPS | 1.02 | 1.01 | 0.01 | 1.0% | Unaudited Condensed Consolidated Statements of Cash Flows Net cash used in operating activities significantly decreased by 71.1% for the six months ended June 30, 2024, primarily due to increased net income and favorable changes in working capital Net cash provided by financing activities decreased substantially by 96.5% due to lower revolver borrowings | Cash Flow (Six Months Ended June 30) | 2024 ($ thousands) | 2023 ($ thousands) | Change ($ thousands) | % Change | | :----------------------------------- | :----------------- | :----------------- | :------------------- | :------- | | Net cash used in operating activities | (19,114) | (66,227) | 47,113 | (71.1)% | | Net cash used in investing activities | (2,751) | (5,290) | 2,539 | (48.0)% | | Net cash provided by financing activities | 1,905 | 54,231 | (52,326) | (96.5)% | | Change in cash | (19,960) | (17,286) | (2,674) | 15.5% | - The decrease in cash used in operating activities was due to a $7.1 million increase in net income adjusted for reconciling items, and favorable changes in working capital of $40.1 million, mainly from accounts payable and inventory[46] Unaudited Condensed Consolidated Statements of Shareholders' Equity Total stockholders' equity increased from $231.57 million at December 31, 2023, to $236.66 million at June 30, 2024 This increase was driven by net income and stock-based compensation, partially offset by dividends paid and adjustments related to postretirement benefits and interest rate swaps | Metric (Six Months Ended June 30, 2024) | Amount ($ thousands) | | :-------------------------------------- | :------------------- | | Balance at December 31, 2023 | 231,565 | | Net income | 15,986 | | Dividends paid | (13,612) | | Stock based compensation | 2,833 |\ | Balance at June 30, 2024 | 236,657 | Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed notes to the unaudited condensed consolidated financial statements, covering accounting policies, revenue recognition, financial instruments, debt, equity, and segment information, offering context and breakdowns for the reported figures Note 1. Basis of presentation The financial statements are prepared in accordance with GAAP for interim information The company operates in two segments: Work Truck Attachments (seasonal, snow/ice management) and Work Truck Solutions (municipal snow/ice control, truck up-fitting) The Work Truck Attachments segment experiences seasonality, with highest sales in Q2/Q3 due to pre-season programs and lowest in Q1 - The Work Truck Attachments segment is seasonal, with highest sales in Q2/Q3 due to pre-season programs and lowest in Q1[196] - The company operates in two segments: Work Truck Attachments (commercial snow and ice management) and Work Truck Solutions (municipal snow and ice control, truck up-fitting)[195] Note 2. Revenue Recognition Revenue is recognized when control of goods/services transfers to the customer The Work Truck Attachments segment recognizes revenue upon shipment, offering discounts The Work Truck Solutions segment recognizes revenue net of truck chassis value, acting as an agent for chassis, and has various revenue streams including fleet, dealer upfit, and state/local bids Contract liabilities increased significantly for the three and six months ended June 30, 2024, compared to 2023 - Work Truck Attachments revenue is recognized upon shipment, with discounts and sales incentives[198] - Work Truck Solutions revenue is recognized net of truck chassis value, as the company acts as an agent for the chassis[201] | Revenue by Customer Type (Six Months Ended June 30) | 2024 ($ thousands) | 2023 ($ thousands) | | :-------------------------------------------------- | :----------------- | :----------------- | | Independent dealer | 219,631 | 225,696 | | Government | 40,788 | 34,545 | | Fleet | 31,119 | 25,654 | | Other | 4,019 | 3,917 | | Total revenue | 295,557 | 289,812 | | Contract Liabilities (Six Months Ended June 30) | 2024 ($ thousands) | 2023 ($ thousands) | | :---------------------------------------------- | :----------------- | :----------------- | | Balance at Beginning of Period | 4,009 | 4,531 | | Additions | 14,569 | 13,250 | | Deductions | (7,014) | (9,852) | | Balance at End of Period | 11,564 | 7,929 | Note 3. Credit Losses The company evaluates accounts receivable for expected credit losses based on customer circumstances, historical data, and future forecasts The total allowance for credit losses increased to $2.07 million at June 30, 2024, from $1.65 million at December 31, 2023 - Credit losses are estimated based on loss-rate and probability of default methods, considering specific customer circumstances, past events, current conditions, and future forecasts[208] | Credit Losses (Six Months Ended June 30) | 2024 ($ thousands) | 2023 ($ thousands) | | :--------------------------------------- | :----------------- | :----------------- | | Balance at December 31 (prior year) | 1,646 | 1,366 | | Additions charged to earnings | 352 | 350 |\ | Changes to net reserve | 72 | (23) | | Balance at June 30 | 2,070 | 1,693 | Note 4. Fair Value The company measures financial assets and liabilities at fair value, categorizing them into Level 1, 2, or 3 inputs Non-qualified benefit plan assets and interest rate swaps are valued using Level 2 inputs, with interest rate swaps showing a positive fair value of $4.27 million at June 30, 2024 The fair value of long-term debt approximates its carrying value - Fair value measurements are categorized into Level 1 (quoted prices), Level 2 (observable market inputs), and Level 3 (unobservable inputs)[182] | Fair Value (June 30, 2024) | Amount ($ thousands) | | :------------------------- | :------------------- | | Non-qualified benefit plan assets | 10,002 | | Interest rate swaps | 4,271 | | Total Assets | 14,273 | | Long-term debt | 189,469 | - Interest rate swaps are valued using Level 2 inputs, with a positive fair value of $4.27 million at June 30, 2024[211] Note 5. Inventories Total inventories remained relatively stable at $139.42 million at June 30, 2024, compared to $140.39 million at December 31, 2023 Raw material and supplies increased, while finished goods and work-in-process decreased Truck chassis inventory financed through a floor plan agreement increased to $3.74 million | Inventory (June 30, 2024) | Amount ($ thousands) | | :------------------------ | :------------------- | | Finished goods | 77,847 | | Work-in-process | 12,528 | | Raw material and supplies | 49,044 | | Total inventories | 139,419 | - Truck chassis inventory financed through a floor plan agreement increased to $3.74 million at June 30, 2024, from $2.22 million at December 31, 2023[185] Note 6. Property, plant and equipment Net property, plant and equipment decreased to $62.77 million at June 30, 2024, from $67.34 million at December 31, 2023, primarily due to accumulated depreciation | Property, Plant & Equipment (June 30, 2024) | Amount ($ thousands) | | :------------------------------------------ | :------------------- | | Total property, plant and equipment (gross) | 168,262 | | Less accumulated depreciation | (105,497) | | Property, plant and equipment, net | 62,765 | Note 7. Leases The company has operating leases for various assets, with lease terms ranging from less than one year to 12 years Total lease cost for the six months ended June 30, 2024, was $3.33 million, an increase from $3.08 million in the prior year Operating lease right-of-use assets and liabilities decreased slightly - Operating leases have remaining terms of less than one year to 12 years, with a weighted average remaining lease term of 51 months and a weighted average discount rate of 5.60% at June 30, 2024[215][138] | Lease Cost (Six Months Ended June 30) | 2024 ($ thousands) | 2023 ($ thousands) | | :------------------------------------ | :----------------- | :----------------- | | Operating lease expense | 3,177 | 2,809 | | Short term lease cost | 153 | 268 | | Total lease cost | 3,330 | 3,077 | Note 8. Other Intangible Assets Net other intangible assets decreased to $116.81 million at June 30, 2024, from $121.07 million at December 31, 2023, primarily due to amortization Amortization expense for intangible assets was $4.26 million for the six months ended June 30, 2024, a decrease from $5.26 million in the prior year | Intangible Assets (June 30, 2024) | Gross Carrying Amount ($ thousands) | Accumulated Amortization ($ thousands) | Net Carrying Amount ($ thousands) | | :-------------------------------- | :---------------------------------- | :------------------------------------- | :-------------------------------- | | Trademark and tradenames | 77,600 | - | 77,600 | | Customer relationships | 80,920 | 45,292 | 35,628 | | Patents | 21,136 | 18,877 | 2,259 | | Total | 273,755 | 156,945 | 116,810 | - Amortization expense for intangible assets decreased to $4.26 million for the six months ended June 30, 2024, from $5.26 million in the prior year[247] Note 9. Long-Term Debt The company's long-term debt, net of current portion, decreased to $173.13 million at June 30, 2024, from $181.49 million at December 31, 2023 The Credit Agreement was amended in January 2024 to modify the minimum required Leverage Ratio and in January 2023 to increase the revolving commitment The company had $189.47 million in term loan borrowings and $63.0 million in revolving credit facility borrowings outstanding at June 30, 2024 - The Credit Agreement was amended in January 2024 to modify the minimum required Leverage Ratio, and in January 2023 to increase the revolving commitment by $50 million to $150 million[15] | Long-Term Debt (June 30, 2024) | Amount ($ thousands) | | :----------------------------- | :------------------- | | Term Loan, net | 189,469 | | Less current maturities | (15,200) | | Long-term debt, net | 173,125 | - At June 30, 2024, the company had $189.47 million in term loan borrowings and $63.0 million in revolving credit facility borrowings outstanding, with $86.45 million remaining borrowing availability[17] Note 10. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities increased to $29.78 million at June 30, 2024, from $25.82 million at December 31, 2023, primarily driven by higher payroll and related costs | Accrued Expenses (June 30, 2024) | Amount ($ thousands) | | :------------------------------- | :------------------- | | Payroll and related costs | 8,148 | | Employee benefits | 7,367 | | Accrued warranty | 4,022 | | Other | 10,246 | | Total | 29,783 | Note 11. Warranty Liability The warranty reserve decreased to $6.68 million at June 30, 2024, from $6.96 million at December 31, 2023 Warranty provisions for the six months ended June 30, 2024, were $1.67 million, while claims paid were $1.95 million - The company accrues for estimated warranty costs based on prior five years of warranty history and management's judgment, adjusting for new products[226] | Warranty Liability (Six Months Ended June 30) | 2024 ($ thousands) | 2023 ($ thousands) | | :-------------------------------------------- | :----------------- | :----------------- | | Balance at beginning of period | 6,957 | 7,876 | | Warranty provision | 1,672 | 2,007 | | Claims paid/settlements | (1,948) | (2,039) | | Balance at end of period | 6,681 | 7,844 | Note 12. Earnings per Share Basic earnings per common share for the six months ended June 30, 2024, was $0.68, up from $0.46 in the prior year Diluted EPS also increased to $0.66 from $0.45 The weighted average common shares outstanding remained relatively stable | EPS (Six Months Ended June 30) | 2024 | 2023 | | :----------------------------- | :--- | :--- | | Basic earnings per common share | $0.68 | $0.46 | | Diluted earnings per common share | $0.66 | $0.45 | | Weighted average common shares outstanding | 23,051,708 | 22,940,863 | Note 13. Employee Stock Plans The company adopted the 2024 Stock Incentive Plan, replacing the 2010 Plan, with a maximum of 1,227,660 shares available Compensation expense related to RSU awards increased significantly for the three and six months ended June 30, 2024, to $2.80 million and $4.23 million, respectively Unrecognized compensation expense for RSUs is approximately $4.51 million, expected to be recognized through 2027 - The 2024 Stock Incentive Plan was adopted, replacing the 2010 Plan, with 1,227,660 shares available for awards[256] - Compensation expense for RSU awards increased to $2.80 million for Q2 2024 (from $1.32 million in Q2 2023) and $4.23 million for H1 2024 (from $2.69 million in H1 2023)[56] - Unrecognized compensation expense for RSUs is approximately $4.51 million, expected to be recognized through 2027[56] Note 14. Commitments and Contingencies The company is involved in various litigation, primarily product liability and intellectual property disputes, but does not believe any pending litigation will have a material adverse effect on its financial position No environmental-related claims are currently pending - The company does not believe any pending litigation (product liability, intellectual property) will have a material adverse effect on its consolidated financial position[26] Note 15. Segments The company operates in two reportable segments: Work Truck Attachments and Work Truck Solutions Segment performance is evaluated based on net sales and Adjusted EBITDA, with corporate costs allocated to both Work Truck Solutions saw significant growth in Adjusted EBITDA, while Work Truck Attachments experienced a slight decline - Segment performance is evaluated based on segment net sales and Adjusted EBITDA, including an allocation of all corporate costs[233] | Net Sales by Segment (Six Months Ended June 30) | 2024 ($ thousands) | 2023 ($ thousands) | | :---------------------------------------------- | :----------------- | :----------------- | | Work Truck Attachments | 141,977 | 160,467 | | Work Truck Solutions | 153,580 | 129,345 | | Total | 295,557 | 289,812 | | Adjusted EBITDA by Segment (Six Months Ended June 30) | 2024 ($ thousands) | 2023 ($ thousands) | | :---------------------------------------------------- | :----------------- | :----------------- | | Work Truck Attachments | 31,324 | 32,065 | | Work Truck Solutions | 13,905 | 3,822 | | Total | 45,229 | 35,887 | Note 16. Income Taxes The effective tax rate for the six months ended June 30, 2024, was 27.9%, higher than 23.1% in the prior year, primarily due to the establishment of reserves for uncertain tax positions and discrete tax expense from stock compensation The company is evaluating new FASB ASU 2023-09 on income tax disclosures - The effective tax rate for the six months ended June 30, 2024, was 27.9% (vs. 23.1% in 2023), due to establishing $0.9 million in reserves for uncertain tax positions and $0.4 million in discrete tax expense from stock compensation[29][74] - The company is evaluating FASB ASU 2023-09, "Improvements to Income Tax Disclosures," effective for annual periods beginning after December 15, 2024[264] Note 17. Restructuring and Impairment In January 2024, the company implemented a Cost Savings Program, resulting in $1.40 million in pre-tax restructuring charges for the six months ended June 30, 2024, primarily for headcount reductions Impairment charges of $1.22 million were recorded for internally developed software at the Work Truck Attachments segment - The 2024 Cost Savings Program resulted in $1.40 million in pre-tax restructuring charges for the six months ended June 30, 2024, mainly for workforce reduction costs[235][293] - Impairment charges of $1.22 million were recorded for certain internally developed software at the Work Truck Attachments segment for the six months ended June 30, 2024[61][73] Note 18. Recent Accounting Pronouncements The company will adopt ASU 2023-07, "Segment Reporting," in fiscal 2024, which requires enhanced disclosure of significant segment expenses It is also evaluating ASU 2023-09, "Improvements to Income Tax Disclosures," effective for annual periods beginning after December 15, 2024 - The company will adopt ASU 2023-07, "Segment Reporting," in fiscal 2024, requiring disclosure of significant segment expenses[31] - The company is evaluating ASU 2023-09, "Improvements to Income Tax Disclosures," effective for annual periods beginning after December 15, 2024[264] Note 19. Changes in Accumulated Other Comprehensive Income by Component Accumulated other comprehensive income (loss) decreased slightly from $6.36 million at December 31, 2023, to $6.24 million at June 30, 2024 This change reflects other comprehensive gains before reclassifications, offset by reclassifications related to interest rate swaps and postretirement benefit items | Accumulated Other Comprehensive Income (Six Months Ended June 30, 2024) | Amount ($ thousands) | | :-------------------------------------------------------------------- | :------------------- | | Balance at December 31, 2023 | 6,356 | | Other comprehensive gain before reclassifications | 1,764 | | Amounts reclassified from accumulated other comprehensive income (loss) | (1,879) | | Balance at June 30, 2024 | 6,241 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's detailed analysis of the company's financial condition, operational results, liquidity, and capital resources Overview The company's operations were impacted by market volatility, supply chain disruptions, labor issues, and inflationary pressures In response, the company implemented a 2024 Cost Savings Program, including headcount reductions and reduced discretionary spending, and amended its Credit Agreement to increase the minimum required leverage ratio - Macroeconomic factors like market volatility, supply chain disruptions, labor issues, and inflation impacted operations[67] - The company implemented a 2024 Cost Savings Program, including salaried headcount reductions and reduced discretionary spending, and amended its Credit Agreement to increase the minimum required leverage ratio[67] Results of Operations This section details the company's financial performance for the three and six months ended June 30, 2024, highlighting changes in net sales, cost of sales, gross profit, selling, general and administrative expenses, impairment charges, interest expense, income taxes, and net income, driven by market conditions and cost-saving initiatives Net Sales Consolidated net sales decreased by 3.6% for the three months ended June 30, 2024, but increased by 2.0% for the six months ended June 30, 2024 The Work Truck Attachments segment experienced a sales decrease due to low snowfall, while the Work Truck Solutions segment saw increased sales due to higher volumes, price increases, and higher chassis sales | Net Sales (Three Months Ended June 30) | 2024 ($ thousands) | 2023 ($ thousands) | Change ($ thousands) | % Change | | :------------------------------------- | :----------------- | :----------------- | :------------------- | :------- | | Total Net Sales | 199,902 | 207,267 | (7,365) | (3.6%) | | Work Truck Attachments | 118,137 | 141,221 | (23,084) | (16.3%) | | Work Truck Solutions | 81,765 | 66,046 | 15,719 | 23.8% | | Net Sales (Six Months Ended June 30) | 2024 ($ thousands) | 2023 ($ thousands) | Change ($ thousands) | % Change | | :----------------------------------- | :----------------- | :----------------- | :------------------- | :------- | | Total Net Sales | 295,557 | 289,812 | 5,745 | 2.0% | | Work Truck Attachments | 141,977 | 160,467 | (18,490) | (11.5%) | | Work Truck Solutions | 153,580 | 129,345 | 24,235 | 18.7% | - Low snowfall in core markets led to lower volumes and decreased sales for the Work Truck Attachments segment[303] Cost of Sales Cost of sales decreased by 5.0% for the three months and 0.9% for the six months ended June 30, 2024, primarily due to lower volumes As a percentage of net sales, cost of sales improved due to lower spending from the 2024 Cost Savings Plan | Cost of Sales (Three Months Ended June 30) | 2024 ($ thousands) | 2023 ($ thousands) | Change ($ thousands) | % Change | | :----------------------------------------- | :----------------- | :----------------- | :------------------- | :------- | | Cost of sales | 138,599 | 145,904 | (7,305) | (5.0%) | | As % of net sales | 69.3% | 70.4% | (1.1%) | | | Cost of Sales (Six Months Ended June 30) | 2024 ($ thousands) | 2023 ($ thousands) | Change ($ thousands) | % Change | | :--------------------------------------- | :----------------- | :----------------- | :------------------- | :------- | | Cost of sales | 215,334 | 217,174 | (1,840) | (0.9%) | | As % of net sales | 72.9% | 74.9% | (2.0%) | | - The decrease in cost of sales as a percentage of sales for the three and six months ended June 30, 2024, was due to lower spending in conjunction with the 2024 Cost Savings Plan[71] Gross Profit Gross profit remained stable for the three months ended June 30, 2024, but increased by 10.5% for the six months ended June 30, 2024 Gross profit as a percentage of net sales improved for both periods, reaching 30.7% and 27.1% respectively, driven by changes in sales and cost of sales | Gross Profit (Three Months Ended June 30) | 2024 ($ thousands) | 2023 ($ thousands) | Change ($ thousands) | % Change | | :---------------------------------------- | :----------------- | :----------------- | :------------------- | :------- | | Gross profit | 61,303 | 61,363 | (60) | (0.2%) | | As % of net sales | 30.7% | 29.6% | 1.1% | | | Gross Profit (Six Months Ended June 30) | 2024 ($ thousands) | 2023 ($ thousands) | Change ($ thousands) | % Change | | :-------------------------------------- | :----------------- | :----------------- | :------------------- | :------- | | Gross profit | 80,223 | 72,638 | 7,585 | 10.5% | | As % of net sales | 27.1% | 25.1% | 2.0% | | Selling, General and Administrative Expense Selling, general and administrative (SG&A) expenses decreased by 6.7% for the three months and 5.4% for the six months ended June 30, 2024 This reduction was primarily due to lower intangibles amortization, stock-based compensation, and incentive-based compensation, partially offset by increased employee benefits and severance costs related to the 2024 Cost Savings Program | SG&A (Six Months Ended June 30) | 2024 ($ thousands) | 2023 ($ thousands) | Change ($ thousands) | % Change | | :------------------------------ | :----------------- | :----------------- | :------------------- | :------- | | SG&A expenses | 49,100 | 51,900 | (2,800) | (5.4%) | - The decrease in SG&A was due to lower intangibles amortization ($1.0 million), stock-based compensation ($1.4 million), incentive-based compensation ($0.9 million), and reduced advertising and travel costs, partially offset by increased employee benefits ($0.6 million) and severance costs ($0.9 million) from the 2024 Cost Savings Program[41] Impairment Charges Impairment charges of $1.2 million were recorded for the six months ended June 30, 2024, related to certain internally developed software at the Work Truck Attachments segment, with no comparable charges in the prior year - Impairment charges of $1.2 million were recorded in H1 2024 for internally developed software at the Work Truck Attachments segment[73] Interest Expense Net interest expense increased to $4.1 million for the three months and $7.6 million for the six months ended June 30, 2024, due to higher interest on the floor plan agreement and increased revolver borrowings | Interest Expense, net (Six Months Ended June 30) | 2024 ($ thousands) | 2023 ($ thousands) | Change ($ thousands) | % Change | | :----------------------------------------------- | :----------------- | :----------------- | :------------------- | :------- | | Interest expense, net | 7,647 | 6,600 | 1,047 | 15.9% | - The increase in interest expense was due to higher interest on the floor plan agreement ($0.7 million for six months) and higher revolver borrowings[42] Income Taxes The effective tax rate for the six months ended June 30, 2024, was 27.9%, up from 23.1% in the prior year, primarily due to the establishment of reserves for uncertain tax positions and discrete tax expense from stock compensation - The effective tax rate for H1 2024 was 27.9% (vs. 23.1% in H1 2023), driven by $0.9 million in reserves for uncertain tax positions and $0.4 million in discrete tax expense from stock compensation[74] Net Income Net income for the three months ended June 30, 2024, increased slightly to $24.3 million, while for the six months, it increased significantly to $16.0 million As a percentage of net sales, net income improved to 12.2% for the three months and 5.4% for the six months | Net Income (Six Months Ended June 30) | 2024 ($ thousands) | 2023 ($ thousands) | Change ($ thousands) | % Change | | :------------------------------------ | :----------------- | :----------------- | :------------------- | :------- | | Net income | 15,986 | 10,854 | 5,132 | 47.3% | | As % of net sales | 5.4% | 3.7% | 1.7% | | | Net Income (Three Months Ended June 30) | 2024 ($ thousands) | 2023 ($ thousands) | Change ($ thousands) | % Change | | :-------------------------------------- | :----------------- | :----------------- | :------------------- | :------- | | Net income | 24,338 | 23,964 | 374 | 1.6% | | As % of net sales | 12.2% | 11.5% | 0.7% | | Liquidity and Capital Resources Total liquidity decreased to $90.7 million at June 30, 2024, from $126.7 million at December 31, 2023, primarily due to business seasonality Net cash used in operating activities decreased significantly by $47.1 million, while net cash provided by financing activities decreased by $52.3 million due to lower revolver borrowings Free cash flow improved substantially, increasing by $49.6 million for the six months ended June 30, 2024 - Total liquidity at June 30, 2024, was $90.7 million, comprising $4.2 million cash and $86.5 million revolving credit facility availability, down from $126.7 million at December 31, 2023[309] - Net cash used in operating activities decreased by $47.1 million for the six months ended June 30, 2024, due to increased net income and favorable working capital changes[46] - Net cash provided by financing activities decreased by $52.3 million for the six months ended June 30, 2024, primarily due to lower revolver borrowings[79] | Free Cash Flow (Six Months Ended June 30) | 2024 ($ thousands) | 2023 ($ thousands) | Change ($ thousands) | | :---------------------------------------- | :----------------- | :----------------- | :------------------- | | Net cash provided by (used in) operating activities | (19,114) | (66,227) | 47,113 | | Net cash used in investing activities | (2,751) | (5,290) | 2,539 | | Free cash flow | (21,865) | (71,517) | 49,652 | Non-GAAP Financial Measures The company uses non-GAAP measures like Adjusted EBITDA, Adjusted net income, and Adjusted EPS to evaluate operating performance, believing they provide additional tools for comparison by removing the impact of certain non-core items Adjusted EBITDA increased by 26.0% for the six months ended June 30, 2024, driven by improved volumes and price realization in Work Truck Solutions, despite lower snowfall impacting Work Truck Attachments Adjusted diluted EPS increased to $0.83 from $0.58 for the six-month period - Non-GAAP measures (Adjusted EBITDA, Adjusted net income, Adjusted EPS) are used to evaluate operating performance by removing the impact of certain non-core items[50][317] | Adjusted EBITDA (Six Months Ended June 30) | 2024 ($ thousands) | 2023 ($ thousands) | Change ($ thousands) | % Change | | :----------------------------------------- | :----------------- | :----------------- | :------------------- | :------- | | Net income (GAAP) | 15,986 | 10,854 | 5,132 | 47.3% | | EBITDA | 39,583 | 31,509 | 8,074 | 25.6% | | Adjusted EBITDA | 45,229 | 35,887 | 9,342 | 26.0% | | Adjusted Diluted EPS (Six Months Ended June 30) | 2024 | 2023 | Change | % Change | | :---------------------------------------------- | :--- | :--- | :----- | :------- | | GAAP diluted earnings per share | $0.66 | $0.45 | $0.21 | 46.7% | | Adjusted diluted earnings per share (non-GAAP) | $0.83 | $0.58 | $0.25 | 43.1% | - Work Truck Solutions Adjusted EBITDA increased by $10.1 million for H1 2024 due to improved volumes, price realization, and efficiencies, while Work Truck Attachments Adjusted EBITDA decreased by $0.8 million due to low snowfall[52][110] Seasonality and Year-to-Year Variability The Work Truck Attachments segment is highly seasonal, with sales heavily influenced by snowfall levels in the prior snow season, leading to peak sales in Q2/Q3 due to pre-season programs and lowest in Q1 This seasonality also impacts working capital needs, which are highest in Q2/Q3 The company manages this through pre-season order programs, a variable cost structure, and a vertically integrated business model - Work Truck Attachments sales are significantly impacted by snowfall levels, with demand driven by equipment wear and tear and professional snowplowers' purchasing power[320] - The pre-season sales program incentivizes distributors to order in Q2/Q3, leading to the greatest sales volume for Work Truck Attachments during these quarters[114] - Working capital needs are highest in Q2/Q3 due to inventory build-up and increased accounts receivable from pre-season sales[115] - Management strategies to mitigate seasonality include pre-season order programs, a variable cost structure, and a vertically integrated business model[89][322] Future Obligations and Commitments There have been no material changes to the company's future obligations and commitments in the three months ended June 30, 2024 - No material changes to future obligations and commitments in Q2 2024[112] Impact of Inflation Inflation in materials and labor significantly impacted profitability in H1 2024 and 2023, though pressures are easing The company expects to mitigate these costs by raising prices, but acknowledges potential timing differences between incurring costs and realizing higher prices - Inflation in materials and labor materially impacted profitability in H1 2024 and 2023, with ongoing pressures expected[319] - The company anticipates mitigating increased costs through price increases, but notes potential timing differences[319] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details the company's exposure to market risks, including interest rate and commodity price fluctuations Interest Rate Risk The company is exposed to interest rate risk due to variable-rate borrowings, including its term loan and revolving credit facility This risk is partially mitigated by interest rate swap agreements A hypothetical 1% interest rate change would impact interest incurred on the revolving credit facility by $0.1 million and on the term loan by $0.1 million for the three months ended June 30, 2024 - The company is exposed to interest rate risk from variable-rate borrowings (term loan, revolving credit facility), partially mitigated by interest rate swap agreements[323] - A hypothetical 1% interest rate change would alter interest incurred by $0.1 million on the revolving credit facility and $0.1 million on the term loan for Q2 2024[92][118] Commodity Price Risk The company faces commodity price risk from steel purchases, which were 5.0% of revenue for the three months ended June 30, 2024 While historically mitigating cost increases through price adjustments, there's a risk of declining gross margins if these costs cannot be passed on The company does not use derivative or hedging instruments for steel price risk - The company is exposed to commodity price risk from steel, which was 5.0% of revenue for Q2 2024 (down from 7.3% in Q2 2023)[119] - Historically, increased steel costs have been mitigated through price increases and surcharges, but future mitigation is not guaranteed, potentially leading to declining gross margins[119] - The company does not use derivative or hedging instruments to manage steel price risk[119] Item 4. Controls and Procedures This section outlines the evaluation of disclosure controls and procedures and changes in internal control over financial reporting Evaluation of Disclosure Controls and Procedures Management, including the Interim CEO and CFO, concluded that disclosure controls and procedures were effective as of June 30, 2024, providing reasonable assurance that required information is recorded, processed, summarized, and reported timely - Disclosure controls and procedures were effective as of June 30, 2024, ensuring timely and accurate financial reporting[120] Changes in Internal Control Over Financial Reporting The company is implementing an ERP system at its Dejana subsidiary, expected to be fully implemented in Q3 2024, which will result in changes to internal control over financial reporting While expected to strengthen or have minimal impact, the company will continue to monitor these controls - An ERP system implementation at the Dejana subsidiary, expected in Q3 2024, will lead to changes in internal control over financial reporting, which the company will continue to evaluate and monitor[327][121] PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, defaults, mine safety, and other relevant information Item 1. Legal Proceedings The company is involved in various litigation matters, primarily product liability and intellectual property disputes, but management does not believe any current litigation is material to its operations or financial position No environmental-related claims are pending - Management does not believe current litigation (product liability, intellectual property) is material to operations or financial position[122] Item 1A. Risk Factors No significant changes to risk factors were identified from the 2023 Annual Report on Form 10-K, except for the addition of a risk related to the ERP system implementation at Dejana, which could adversely impact timely financial statements or internal control over financial reporting - A new risk factor was added regarding potential adverse impacts of the Dejana ERP system implementation on timely financial statements or internal control over financial reporting[123][329] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered equity securities were sold during the three months ended June 30, 2024 The company has a $50.0 million share repurchase plan authorized in February 2022, with $44.0 million still available as of June 30, 2024, but no shares were repurchased during the quarter - No unregistered equity securities were sold in Q2 2024[124] | Share Repurchase Program (Q2 2024) | Amount ($ thousands) | | :--------------------------------- | :------------------- | | Total shares purchased | - | | Value available under program | 44,000 | - The 2022 repurchase plan authorizes up to $50.0 million in share repurchases, with no expiration date, and $44.0 million remained available as of June 30, 2024[131] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities - No defaults upon senior securities were reported[126][133] Item 4. Mine Safety Disclosures The company reported no mine safety disclosures - No mine safety disclosures were reported[100] Item 5. Other Information No director or officer adopted or terminated a Rule 10b5-1 trading arrangement during the three months ended June 30, 2024 The senior credit facilities include restrictions on dividend payments and asset transfers from subsidiaries - No director or officer adopted or terminated a Rule 10b5-1 trading arrangement in Q2 2024[101] - Senior credit facilities restrict the company's ability to pay dividends and its subsidiaries' ability to transfer assets[132] Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including various agreements, grant notices, certifications, and financial statements in inline XBRL format - Exhibits include retirement and transition agreements, consulting agreements, restricted stock unit grant notices, certifications (Sarbanes-Oxley Act), and financial statements in inline XBRL format[331] SIGNATURES This section contains the official signatures certifying the accuracy and completeness of the report Signatures The report is signed by Sarah Lauber, Executive Vice President and Chief Financial Officer, on behalf of Douglas Dynamics, Inc - The report was signed by Sarah Lauber, Executive Vice President and Chief Financial Officer, on July 30, 2024[130]